ECON 201 WEEK 7 Finishing Up Monopolies: Natural Monopolies.
Public Policy and Monopolies The British Experience.
-
Upload
gillian-barton -
Category
Documents
-
view
221 -
download
0
Transcript of Public Policy and Monopolies The British Experience.
![Page 1: Public Policy and Monopolies The British Experience.](https://reader036.fdocuments.in/reader036/viewer/2022081809/56649e545503460f94b4ac84/html5/thumbnails/1.jpg)
Public Policy and Monopolies
The British Experience
![Page 2: Public Policy and Monopolies The British Experience.](https://reader036.fdocuments.in/reader036/viewer/2022081809/56649e545503460f94b4ac84/html5/thumbnails/2.jpg)
Too Little Competition and Market Failure
• What is regulation? • Rules set by government or their agencies that seek to control the
operation of firms who may have monopoly power in their own industry
• Regulation is designed to deal with the problem of market failure – where markets fail to reach an optimal allocation of resources
• Monopoly power may lead to consumers being exploited (i.e. prices charged above the true marginal cost of supply) – leading to excess profits being made by suppliers in the market
• In terms of regulation of monopoly the government attempts to prevent operations that are against the public interest – so called anti-competitive practices
![Page 3: Public Policy and Monopolies The British Experience.](https://reader036.fdocuments.in/reader036/viewer/2022081809/56649e545503460f94b4ac84/html5/thumbnails/3.jpg)
Structural Reasons forMarket Failure
• Regulation and the Structure of the market • Problems occur when the market structure in a
given industry becomes monopolistic – e.g. if a merger or a take-over causes a firm to supply more than 25% of the market output (defined as a working monopoly). Mergers are investigated by the Competition Commission.
• Oligopolies can also lead to market failure – particularly if there is er by the dominant businesses within an industry vidence of collusive behavior
![Page 4: Public Policy and Monopolies The British Experience.](https://reader036.fdocuments.in/reader036/viewer/2022081809/56649e545503460f94b4ac84/html5/thumbnails/4.jpg)
Anti-Competitive Behavior
• Anti-competitive agreements • fixing purchasing and selling prices • limiting production, technical development,
investment • sharing markets or supply sources • applying different trading conditions to equivalent
transactions• Abuse of dominant market position • normally where a firm has over 40% of the market • imposing unfair purchasing or selling prices
![Page 5: Public Policy and Monopolies The British Experience.](https://reader036.fdocuments.in/reader036/viewer/2022081809/56649e545503460f94b4ac84/html5/thumbnails/5.jpg)
British Gas Utility• Gas • British Gas privatised in 1986 • Creation of private utility company with substantial monopoly
power • Creation of Office of Gas Supply (OFGAS) • Gas release programme to require BG to sell to other shippers at a
price determined by BG’s costs (1992) • BG monopoly over supply below 25000 therms reduced to 2500
giving access to the domestic market for other suppliers (1992) • Divestment of vertically integrated businesses encouraged and
happened in 1997 with the creation of Transco (pipeline) and Centrica (supply)
• Expansion of competition for gas supply into the domestic market
![Page 6: Public Policy and Monopolies The British Experience.](https://reader036.fdocuments.in/reader036/viewer/2022081809/56649e545503460f94b4ac84/html5/thumbnails/6.jpg)
Regulating Prices• Price regulation for Gas • BG is only allowed to increase its prices in line with a
complex formula - the current restriction expires on 31st March 2000. In the autumn of 1999, BG announced it was scrapping standing charges for household gas users.
• � prices can go up if the RPI increases but only by a fraction of this
• � prices can go up in line with gas costs, minus a factor
• � prices can go up in line with costs of improvement in energy efficiency
• � This kind of restriction is known as an RPI-X formula
![Page 7: Public Policy and Monopolies The British Experience.](https://reader036.fdocuments.in/reader036/viewer/2022081809/56649e545503460f94b4ac84/html5/thumbnails/7.jpg)
Results• Overall competition in the gas supply market is developing well. • 96% of customers are aware of their ability to choose an alternative
gas supplier • 25% of customers have switched gas supplier – but over 75% of
households have remained with their original gas supplier • The level of customer switching is continuing at about 32,000 per
week • The number of rival suppliers to BGT is well in excess of that
required for competition • Discounts of up to 20% compared to BGT’s tariffs available. • Increasingly the gas and electricity supply markets are being
characterised by ‘dual fuel’ offers, with almost half of electricity and gas switchers supplied on ‘dual fuel’ contracts.
![Page 8: Public Policy and Monopolies The British Experience.](https://reader036.fdocuments.in/reader036/viewer/2022081809/56649e545503460f94b4ac84/html5/thumbnails/8.jpg)
British Telecom• British Telecom was privatised in 1984 although Mercury had been
granted a licence in 1982 and began operating in 1983. The industry regulator OFTEL was established at the same time. Initial regulation was a pricing formula of RPI-X, where X = 3% for the first 5 years
• Competition was also encouraged with other operators e.g. in 1985 - Cellnet and Vodafone
• Began at RPI - 3% • 1988 moved to RPI - 4.5% • 1991 increased to RPI - 6.25% • 1993 raised to RPI- 7% • Erosion of the duopoly between BT and Mercury - by 1996 there were
over 100 local cable operators and18 fixed link operators such as Energis and Ionica
• Mobile telephone operators are now bidding for 5 new transmission licences
![Page 9: Public Policy and Monopolies The British Experience.](https://reader036.fdocuments.in/reader036/viewer/2022081809/56649e545503460f94b4ac84/html5/thumbnails/9.jpg)
BT Results• Developments in the market for telecommunications • Average UK telecoms prices have fallen almost 50% in
real terms in the last ten years and competition has fostered the development and introduction of new services
• Telecommunications regulation is now being rolled back where competition has provided consumer protection
• OFTEL will no longer promote competition where it considers the market is competitive
• In markets where competition is not effective OFTEL will continue to promote competition